The Social Security Tax Cut And The Ignorance of Political Experts

Political consultants have a well-deserved reputation as being some of the most incompetent human beings ever to walk the planet. Mark Penn, Hillary Clinton’s top aid in her 2008 presidential campaign, famously remarked that the American people will not elect someone named Barack Hussein Obama as president. Mr. Penn received several million dollars for his work on the Clinton campaign.

This background must be kept in mind when we have these people tell us that we should not worry about the future of Social Security just because President Obama has proposed extending and expanding the 2.0 percentage point cut in the payroll tax. Under President Obama’s proposal, the Social Security trust fund would be credited with the same amount of revenue as if the tax cut were not in place, just as is happening in 2011.

While there is nothing in principle wrong with financing Social Security in part out of general revenue for two or three years in the middle of a severe economic downturn, the question is what will happen when the economy recovers enough that we no longer need this tax cut as stimulus. In principle the tax should simply revert to its normal level.

As the Congressional Budget Office recently projected, this would be sufficient to keep the program fully funded through the year 2038 and more than 80 percent funded through the rest of the century. Those familiar with arithmetic know that the program as currently structured is essentially fine long into the future.

However, it is not clear that Congress will allow the tax to revert to its normal level of 6.2 percent on both the employer and employee. Democrats in Congress have already been railing against Republicans who appear reluctant to extend the payroll tax cut. They have complained that Republicans, who support tax cuts for billionaires, are willing to raise taxes on ordinary workers.

Of course Republicans are much better at this anti-tax rhetoric. And they will be able to remember what the Democrats said this fall when it’s time to restore the tax to its normal level in 2012, 2013, or 2015. They will not be shy to attack the Democrats for wanting to raise taxes on Joe the Plumber and friends. Would anyone bet on the Democrats standing up to these attacks?

If the Social Security tax were not restored to its former level, then we could in principle continue to make up the difference from general revenue. However, there certainly is no agreement that this will be done. Since its inception, Social Security has been financed from the designated payroll tax. This tax has been used to sustain the trust fund, which is in principle separate from the rest of the budget.

This arrangement is not written in stone. However, without a clear commitment to support Social Security from general revenue, there is little reason to expect that Republicans, and even many Democrats who are openly hostile to Social Security, will suddenly turn around and agree to establish a whole new funding source for Social Security. More likely they will note the worsened financing of the program and insist on the urgent need for cuts in benefits.

Now the political consultants tell us not to worry about this scenario. But these people are not counting on Social Security to support them in their retirement. Nor for their matter is President Obama and most of the members of Congress who are pushing the Social Security tax cut. If this leads to sharp cuts in benefits it will be just one more of the bad breaks that has resulted from their decisions – kind of like this recession itself.

There is a very simple way around this potential problem. If we want to give a tax cut to workers equal to 3.1 percent of wages, as President Obama has proposed, along with a similar cut to some employers, we can just write that into the law without any reference to Social Security.

In other words, the tax cut would take the form of a tax credit that is paid out to workers and firms in exactly the amounts that President Obama proposed. However this credit would have no connection whatsoever to the Social Security tax, which continues to get collected at its normal rate.

This should involve zero additional administrative expense compared with what President Obama has proposed; it is simply a change in terminology. It is possible that Republicans who would support a cut in the Social Security tax would balk when it is described as a tax credit. This should tell us something.

It would be unfortunate if Congress did not pass something like this tax credit, which would give a modest boost to the economy and createclose to 1 million jobs. However, the people who wrecked the economy and put us in this horrible situation should not be allowed to blackmail the country into surrendering Social Security.

We can find many ways to create jobs. We don’t have to take the one route that may come with the permanent cost of ending Social Security as we know it. And the reassurances from the highly paid political consultants who tell us that Social Security is not endangered are worth as much as their assertion that Barack Hussein Obama would never end up in the White House.

Thanks' Dean, once again you have hit the nail on the head;
"Would anyone bet on the current Democrat Leadership standing up to these Right-Wing attacks on a proven seventy five year old system ?".

A Democrat President that has established himself as a military empire builder who is willing to toss Social Security, Medicare, Medicaid, and the Constitutionally mandated Post Office on the chopping block to fund endless unprovoked military adventures all over the planet. Every Progressive Democrat should be screaming at the top of their lungs to dump this president or at least put up a real Progressive Candidate in 2012 that is intent on preserving a reasonable standard of living for current and future generations of Americans that are just trying to survive in our ever present Plutocracy.

There is nothing ethical about SS loaning money to any entity of the USA government , It is a conflict of interest and is very risky way of doing business.The SS money should be kept separate from the general fund and not even invested in Tee - Bills, there are plenty of investments available for SS. without risky conflicts of interest . If the US budget gets in trouble then the investments of SS are also in trouble , that don't have to happen.SS should make no loans to the USA period.

FDR was wise to originally construct this program in such a way that the designated funds have remained relatively untouched for over 75 years, and that was in a time much like today when big money rigged the system to pay off in their favor. However, I'll bet that FDR never anticipated that conditions would deteriorate to the point that our elected officials would end up giving the whole country away to domestic and foreign wealthy private interests.

You and I simply disagree on this point, as I have written numerous times on the New Economics Perspectives blog (http://neweconomicperspectives.blogspot.com).

When it comes to Social Security, no one was a more honest and forceful defender than Robert Eisner (Northwestern Univ. economist and Clinton's former prof.). Eisner said, "The notion that Social Security faces bankruptcy begins with a fundamental misconception, that payment of benefits somehow depends upon the OASDI (Old Age and Survivors and Disability Insurance) trust funds. The trust funds are merely accounting entities....

...Our payroll taxes or "contributions" go directly to the United States Treasury. Our benefit checks come from the Treasury-and those receiving them can verify on those checks that the payer is the Treasury of the United States, and not any trust fund. Social Security payments are an obligation under law of the U.S. government. Our government and its Treasury will not,indeed cannot, go bankrupt. As Federal Reserve Chairman Alan Greenspan has recently put it, '[A] government cannot become insolvent with respect to obligations in its own currency.'"

You sort of make that point in the beginning of this piece, but you still tie the viability of Social Security to the balance in the Trust Fund. Eisner always insisted that the former does not depend upon the latter. Having said that, he did offer a ploy to satisfy those who insist that the Trust Fund remain actuarially solvent. What he offered was straightforward way to keep the balance in the Trust Funds high enough to satisfy even the most pessimistic CBO official.

Eisner said:

"For those concerned, nevertheless, about the "solvency" of the trust
funds, there are simple, painless remedies for this accounting problem....why not award balances in the Trust funds, instead of the current 5.9 percent interest rate on long-term government bonds, [a] higher return... [for] it was not God but Congress and the Treasury that determined the interest rate to be credited on the non-negotiable Treasury notes of the fund balances."

So there you go. Congress could simply agree to credit the Trust Funds at 10, 25, 40, 100, or 500 percent, making the entire "problem" go away.

Interested readers can find Eisner's full piece "Save Social Security from its Saviors" here: http://www.jstor.org/stable/4538614

Sure, the viability of Social Security (SS) as a whole is not directly tied to the balance in the SS Trust Fund. However, what will happen towards the end of this decade when SS will need to start to draw down on this Trust Fund? Answer: The special Treasury securities that are currently a part of the SS Trust Fund will need to be cashed in for revenue that will likely come out of general federal revenue, more tax increases, or cuts in something other than SS. Anyway that one tries to slice it, doing these things will have a negative affect on the federal budget, and we need to act soon in order to avoid this from happening.

"Congress could simply agree to credit the Trust Funds at 10, 25, 40, 100, or 500 percent, making the entire 'problem' go away."

Geeze...talk about weakening the SS Trust Fund! Simply putting imaginary, overly-inflated interest amounts (whether those special SS Trust Fund securities will ever be cashed in or not) will very simply be interpreted as an insincere inside-the-beltway shell game, which would further erode support for the SS Trust Fund. What a truly horrible idea...ugh...

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